Sustainable Governance Indicators SGI 2015 Slovenia Report Miro Hacek, Susanne Pickel, Frank Bönker (Coordinator) SGI 2015 | 2 Slovenia Report Executive Summary In the 2013 – 2014 period, Slovenia continued to grapple with the double-dip recession that had commenced in 2009, seeking to avert a full-blown debt crisis. While the center-left Alenka Bratušek government was preoccupied with short-term crisis management, failing to adopt many of the structural reforms it promised, it did succeed in maintaining liquidity and did not have to draw on EU bailout funds. Compared to its predecessor, the Bratušek government took a more inclusive approach, seeking to revive the country’s corporatist tradition. However, the courts’ controversial treatment of conservative former Prime Minister Janez Janša helped sustain the country’s strong political polarization. The disintegration of the ruling coalition and the inner conflicts within Bratušek’s Positive Slovenia party eventually resulted in early elections to the National Assembly in July 2014. As in 2011, these elections were won by a newly established political party, in this case the Modern Center Party (SMC) led by Miro Cerar. The ability of a party formed just over a month before the elections to obtain more than a third of the vote, the largest share a party has received since Slovenia’s independence in 1991, is an indicator of the population’s disenchantment with politics and deep distrust in the political system. However, the fact that the country’s democratic institutions remain intact despite such political turbulence testifies to the quality of democracy in Slovenia. The country’s electoral process is free and fair, civil rights and political liberties are largely respected, and the media are largely independent. New rules adopted in January 2014 have made party financing more transparent. However, the contrast between the handling of former Prime Minister Janša’s case and the more lenient treatment of some left-wing politicians accused of corruption has raised some concerns about the independence of the judiciary and the government’s commitment to fighting corruption. The resignation of the three chairmen of the Commission for the Prevention of Corruption (CPC) in November 2013 raised further questions. One traditional Slovenian peculiarity has been the broad use of popular decision-making mechanisms. However, legal changes in May 2013 limited these previously far-reaching rights, and as a result, only a single referendum was held in 2014. This was unsuccessful due to low voter turnout. SGI 2015 | 3 Slovenia Report In terms of governance, Slovenia has been characterized by a strong corporatist tradition. The effects of this system on the government’s strategic capacity have been ambivalent. Under previous governments, the unions’ political influence prevented the adoption of reforms. However, as Slovenia’s economic problems became more visible and acute, the unions eventually accepted major reforms, giving the Bratušek government a chance to capitalize on the support of the social partners. Partly as a result of this strong corporatist tradition, policymaking in Slovenia has suffered from a lack of strategic planning, limited reliance on independent academic experts, a weak core executive, an increasingly politicized civil service, and a largely symbolic use of RIA. There has been no regular self-monitoring of institutional arrangements. Unlike its predecessor, the Bratušek government did not undertake substantial institutional reforms. Key Challenges At first look, the government formed after the July 2014 elections appears to be in a very strong political position. Prime Minister Cerar and his Modern Center Party (SMC) party enjoy a strong popular mandate, the government rests on stable support in the National Assembly, and the opposition is divided into two right-wing and two left-wing parties. Moreover, the resumption of economic growth after two years of shrinking GDP is likely to boost the popularity of the new government, and will help to reduce the fiscal deficit and limit the public debt. The new government has raised strong expectations by appealing to the popular dissatisfaction with corruption and the old establishment. If it wants to avoid the fate of the Positive Slovenia party – which won the 2011 elections, but split up and was marginalized in 2014 – and counter the rise in cynicism regarding the Slovenian political class, it has to live up to these expectations. This means the new government has to intensify the fight against corruption and dispel the public doubts regarding the judiciary’s independence prompted by the variance in treatment accorded to plaintiffs from different political camps. Moreover, the new government must demonstrate that it really is a government of and by experts, and thus transcends the old left-right schism in Slovenian politics. In order to achieve this goal, a number of changes in the Slovenian policymaking process might be helpful. For instance, the civil service should be depoliticized, with the career civil-service model reestablished. Similarly, the government could make greater use of expert SGI 2015 | 4 Slovenia Report advice, strengthen strategic planning and improve the RIA system. Such changes would make it easier for the government to take a long-term perspective, overcome resistance by special-interest groups and win public acceptance for reforms. In terms of policy, the primary challenge facing the new government is to move from a focus on short-term crisis management to structural reforms. The fact that the economy has returned to growth does not mean that the structural problems hampering the Slovenian economy such as a high level of state ownership, weak corporate governance, a fragile banking system and an overleveraged corporate sector have been overcome. The new government should accelerate the privatization measures initiated by the Bratušek government, and pay renewed attention to issues such as R&D and education, which have been neglected for some time. Improving the country’s capacity to absorb EU funds will be crucial for fostering innovation. In the field of social policy, a reform of the health care system, an issue that has been on the agenda for some time, appears most urgent. SGI 2015 | 5 Slovenia Report Policy Performance I. Economic Policies Economy Economic Policy In the period under review, Slovenia struggled to overcome a protracted Score: 5 economic crisis that was compounded by rising public debt, high unemployment rates and a problematic banking sector. Especially during the first half of 2013, credit ratings assigned to the country by the top rating agencies dropped significantly, pushing Slovenia to the brink of a full-blown debt crisis. While overall reforms remained modest, the Bratušek government ultimately succeeded in averting the crisis, and Slovenia was not forced to draw on EU bailout funds. In the second half of 2014, the economy returned to a condition of positive growth. The recovery appears broad-based, with both external and domestic improvements. Net exports have remained resilient and investment has risen, largely due to EU-funded projects. Labor Markets Labor Market As a result of the economic recession, unemployment rates in Slovenia rose Policy from 2009 to 2013. In 2013, the employment rate among those aged 20 to 64 fell Score: 5 below the EU average for the first time. In 2014, the labor-market situation began to improve. In August 2014, the unemployment rate was 1.6 percentage points lower than a year previously. The drop in unemployment was caused largely by the economic recovery. While Slovenia has a tradition of labor- market policy that dates back to Yugoslav times, existing programs and policies have not proven very effective. In November 2013, the Bratušek government introduced a new program for first-time job seekers. Financed primarily by the European Social Fund (ESF), this program provided subsidies to employers for hiring new labor-market entrants under the age of 30. Citation: Insitute of Macro-Economic Analysis and Development (2014): Development Report 2014. Available at: http://www.umar.gov.si/fileadmin/user_upload/publikacije/pr/2014/Apor_2014.pdf, pp. 57-59 SGI 2015 | 6 Slovenia Report Taxes Tax Policy Slovenia’s tax system was overhauled in the 2004 – 2008 term, and has changed Score: 4 only gradually since then. Tax revenues have been relatively high in relation to GDP, but have not been sufficient to prevent the emergence of high budget deficits. Tax revenues stem from a broad range of taxes, with a high percentage of about 40% of all tax revenues coming from social insurance contributions. A progressive income tax with tax rates of 16%, 27% and 41% provides for some vertical equity. As the thresholds are set rather low, however, the majority of middle-income class citizens fall into the highest category. The tax burden for enterprises is below the EU average, but higher than in most other East-Central European countries. As part of its effort to limit the budget deficit, the Bratušek government increased the value-added tax, and sought to introduce a new tax on real estate, which forecasts predicted would result in additional annual tax revenues of about €400 million. In late March 2014, however, the Constitutional court unanimously annulled the Real Estate Tax Act, arguing that key parts of the law, including the envisaged method of assessing property values, were unconstitutional. Budgets Budgetary Policy The Bratušek government succeeded in reducing the fiscal deficit through a Score: 5 combination of increases in taxes and cuts in benefits. However, the deficit still amounted to more than 4% of GDP in 2014, and the national public debt reached an all-time high in 2014. In order to stress its commitment to a sustainable budgetary policy, the parliament – in line with the European Union’s Fiscal Compact – enshrined a “debt brake” in the constitution in May 2013. The incoming Cerar government committed itself to reducing the fiscal deficit to below 3% of GDP in 2015.